Sound Financial Bancorp, Inc. Reports Net Income of $1.8 million for Second Quarter 2019

SEATTLE, July 26, 2019 (GLOBE NEWSWIRE) -- Sound Financial Bancorp, Inc. (Nasdaq: SFBC), the holding company (the "Company") for Sound Community Bank (the "Bank"), today reported net income of $1.8 million for the quarter ended June 30, 2019, or diluted earnings per share of $0.71, as compared to net income of $1.4 million, or diluted earnings per share of $0.56 for the quarter ended March 31, 2019 and $2.0 million or diluted earnings per share of $0.77 for the quarter ended June 30, 2018.

On July 26, 2019, the Company announced that its Board of Directors authorized a stock repurchase program. Under this repurchase program, the Company may repurchase its outstanding shares in the open market in an amount up to $1,750,000, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on August 5, 2019, continuing until the earlier of the completion of the repurchase or six (6) months, depending upon market conditions.

The Company also announced today that the Board of Directors has declared a cash dividend on Company common stock of $0.14 per share, payable on August 22, 2019 to stockholders of record as of the close of business on August 8, 2019.

"Significant loan payoffs along with our first quarter strategic loan sale of residential loans, which is consistent with our efforts to adjust the mix of our loan portfolio to improve yields, resulted in lower loan balances," said Laurie Stewart, President and CEO of the Company and the Bank. "We also continued our focus on deposit growth as our primary funding source which has allowed us in recent periods to reduce our reliance on higher cost brokered deposits and borrowings," concluded Ms. Stewart.

Highlights for the quarter ended June 30, 2019 include:

Loans held-for-portfolio decreased 3.3% to $565.4 million at June 30, 2019, from $584.5 million at March 31, 2019 and decreased $25.4 million or 4.3% from $590.8 million at June 30, 2018;

Total deposits decreased 0.7% to $579.5 million at June 30, 2019, from $583.7 million at March 31, 2019 and increased 7.4% from $539.4 million at June 30, 2018. Non-interest bearing deposits decreased $2.5 million or 2.5% compared to March 31, 2019 and increased $11.5 million, or 13.6% compared to June 30, 2018;

Total borrowings decreased $8.8 million, or 35.0% to $16.3 million at June 30, 2019, from $25.0 million at March 31, 2019, and decreased $54.8 million, or 77.1% from $71.0 million at June 30, 2018;

Total assets decreased 1.7% to $686.0 million at June 30, 2019, from $697.6 million at March 31, 2019 and decreased slightly from $686.2 million at June 30, 2018;

Net interest income decreased 9.0% to $6.4 million during the quarter ended June 30, 2019, from $7.0 million during the quarter ended March 31, 2019 and decreased 7.7%, from $6.9 million during the quarter ended June 30, 2018;

Net interest margin ("NIM") was 3.97% for the quarter ended June 30, 2019, compared to 4.19% for the quarter ended March 31, 2019 and 4.34% for the quarter ended June 30, 2018; and

We recorded a recapture from the allowance for loan losses of $200,000 for the quarter ended June 30, 2019, compared to a recapture from the allowance for loan losses of $200,000 for the quarter ended March 31, 2019 and a provision for loan losses of $150,000 for the quarter ended June 30, 2018.

The Bank continued to maintain capital levels in excess of the regulatory requirements and was categorized as "well-capitalized" at June 30, 2019.

Operating Results

Net interest income decreased $631,000, or 9.0%, to $6.4 million during the quarter ended June 30, 2019, compared to $7.0 million during the quarter ended March 31, 2019 and decreased $534,000, or 7.7%, from $6.9 million during the quarter ended June 30, 2018. The decrease from the prior quarter and same period a year ago was primarily a result of lower average loan balances and lower loan yields combined with higher interest expense.

Interest income decreased $537,000, or 6.1%, to $8.2 million during the quarter ended June 30, 2019, compared to $8.8 million during the quarter ended March 31, 2019 and increased $122,000, or 1.5%, compared to $8.1 million during the quarter ended June 30, 2018. Interest income on loans decreased $547,000, or 6.5%, to $7.8 million during the quarter ended June 30, 2019, compared to $8.4 million for the quarter ended March 31, 2019, and decreased $38,000, or 0.5%, compared to $7.9 million for the quarter ended June 30, 2018, primarily due to lower average loan balances and lower average loan yields. The average loans held-for-portfolio balance was $575.9 million for the quarter ended June 30, 2019, compared to $612.1 million for the quarter ended March 31, 2019, and $576.7 million for quarter ended June 30, 2018. The average yield on loans held-for-portfolio was 5.43% for the quarter ended June 30, 2019, down 11 basis points from 5.54% for the quarter ended March 31, 2019 and down 6 basis points from 5.49% for the quarter ended June 30, 2018. Interest income on the investment portfolio increased $10,000, or 2.4% from the quarter ended March 31, 2019, and increased $160,000, or 60.6%, from the quarter ended June 30, 2018.

Interest expense increased $94,000, or 5.3%, to $1.9 million for the quarter ended June 30, 2019, compared to $1.8 million for the quarter ended March 31, 2019 and increased $656,000, or 53.7%, compared to $1.2 million for the quarter ended June 30, 2018. The increase from the prior quarter was a result of the higher weighted-average cost of deposits, partially offset by a lower average deposit balance. The weighted average cost of deposits increased to 1.14% for the quarter ended June 30, 2019, up 10 basis points from 1.04% for the quarter ended March 31, 2019. The average deposit balance was $569.8 million for the quarter ended June 30, 2019, compared to $574.6 million for the quarter ended March 31, 2019.

The interest expense increase from the comparable period a year ago was due primarily to an increase in average balance and an increase in interest rate paid on deposits, as well as an increase in cost of Federal Home Loan Bank ("FHLB") borrowings, partially offset by lower average balances. Interest expense on deposits increased $741,000, or 84.1%, to $1.6 million for the quarter ended June 30, 2019, compared to $881,000 a year ago, driven primarily by an increase of $35.6 million, or 8.1% in the average balance of interest-bearing deposits. The average rate paid on deposits increased to 1.14% for the quarter ended June 30, 2019, up 47 basis points from 0.67% for the quarter ended June 30, 2018. Interest expense on FHLB borrowings decreased $85,000, or 24.9%, to $256,000 for the quarter ended June 30, 2019, compared to a year ago, due to a $43.8 million, or 64.4% decrease in the average balance of FHLB borrowings to $24.2 million. The average rate paid on FHLB borrowings increased to 4.25% for the quarter ended June 30, 2019, compared to 2.01% for the quarter ended June 30, 2018, primarily as a result of $126,000 interest expense recognized at maturity on a FHLB term advance during the second quarter of 2019.

Net interest margin decreased to 3.97% for the quarter ended June 30, 2019, compared to 4.19% for the quarter ended March 31, 2019 and 4.34% for the quarter ended June 30, 2018. The decrease from the prior quarter was a result of $126,000 interest expense recognized at maturity on FHLB term debt during the quarter, combined with lower average loan balances. The decrease compared to the year ago period was primarily due to higher funding costs as interest rates paid on interest-bearing liabilities increased more rapidly than yields earned on interest-earning assets.

We recorded a recapture from the allowance for loan losses of $200,000 for the quarter ended June 30, 2019, compared to a recapture from the allowance for loan losses of $200,000 for the quarter ended March 31, 2019 and provision for loan losses of $150,000 for the quarter ended June 30, 2018. The recapture in the current quarter was primarily a result of the lower balance in loans held-for-portfolio.

Noninterest income decreased $49,000, or 4.9%, to $959,000 for the quarter ended June 30, 2019, compared to $1.0 million for the quarter ended March 31, 2019 and decreased $180,000, or 15.8%, from $1.1 million for the quarter ended June 30, 2018. The decrease from the sequential quarter was primarily a result of a decrease in gain on sale of loans of $227,000 during the quarter due to the first quarter residential loan sale, partially offset by a $14,000 increase in mortgage servicing income and a $162,000 downward mark-to-market adjustment on fair value of mortgage servicing rights. The decrease from the same period a year ago primarily was a result of a decrease of $39,000 in mortgage servicing income combined with a $73,000 upward mark-to-market adjustment on fair value of mortgage servicing rights and $84,000 decrease in net gain on sale of loans, partially offset by a $18,000 increase in service charges and fee income.

Noninterest expense decreased $1.2 million, or 18.2%, to $5.2 million for the quarter ended June 30, 2019, compared to $6.4 million for the quarter ended March 31, 2019 and decreased $171,000, or 3.2%, from $5.4 million for the quarter ended June 30, 2018. The decrease from the quarter ended March 31, 2019 was primarily a result of salaries and benefits expense decreasing $985,000 during the quarter combined with a $184,000 decrease in operations expense.

The $171,000 decrease in noninterest expense compared to the quarter ended June 30, 2018 was primarily due to a decrease of $401,000 in salaries and benefits, partially offset by a $252,000 increase in operations expense. Operations expense increased from a year ago, primarily due to an increase in legal fees and professional fees.

The efficiency ratio for the quarter ended June 30, 2019 was 71.50%, compared to 79.97% for the quarter ended March 31, 2019 and 67.28% for the quarter ended June 30, 2018. The improvement in the efficiency ratio compared to the quarter ended March 31, 2019 was due to lower noninterest expense. The increase compared to the year ago period was primarily due to higher interest expense on deposits and borrowings.

Balance Sheet Review, Capital Management and Credit Quality

Total assets at June 30, 2019 were $686.0 million, compared to $697.6 million at March 31, 2019 and $686.2 million at June 30, 2018. The decrease in assets from the sequential quarter-end was primarily due to a lower balance of loans held-for-portfolio and a decline in FHLB stock, partially offset by higher cash and cash equivalents. The decrease from one year ago was primarily a result of the lower balance in loans held-for-portfolio, partially offset by higher cash balances and the capitalization of the right of use assets of $7.9 million in accordance with our implementation of new lease accounting guidance. The adoption of accounting guidance for leases (“ASU 2016-02”) in 2019 required the Company to recognize right of use lease assets and corresponding lease liabilities on the balance sheet. FHLB stock decreased $350,000 to $1.5 million at June 30, 2019, from $1.9 million at March 31, 2019 and decreased $2.1 million, from $3.6 million at June 30, 2018, as a result of reduced borrowing needs.

Cash and cash equivalents increased $7.9 million, or 10.9%, to $80.4 million at June 30, 2019, compared to $72.5 million at March 31, 2019 and increased $21.0 million, or 35.3%, compared to $59.4 million at June 30, 2018. The increase from the prior quarter-end and one year ago was a result of the loan sale during the first quarter of 2019 which was executed for strategic reasons with proceeds being retained in cash and cash equivalents as we look to utilize it by increasing our residential loan mix with higher coupon fixed rate loans.

Loans held-for-portfolio decreased to $565.4 million at June 30, 2019, compared to $584.5 million at March 31, 2019 and decreased from $590.8 million at June 30, 2018. The largest decreases in the loan portfolio compared to the prior quarter were in commercial and multifamily real estate, one-to-four family and home equity loan portfolios. The commercial and multifamily real estate decreased $19.3 million, or 7.8%, to $226.2 million compared to the prior quarter. The one-to-four family loan portfolio decreased $5.8 million, or 3.8%, to $145.6 million and the home equity loan portfolio decreased $1.4 million, or 5.6%, to $23.1 million. The decreases were partially offset by increases of $3.8 million in the construction and land loan portfolio and $1.2 million in floating home loan portfolio. The largest decreases in loan portfolio compared to the year ago quarter were in one-to-four family, commercial and multifamily real estate, commercial business and home equity loan portfolios. The one-to-four family portfolio decreased $20.8 million, or 12.5%, to $145.6 million, the commercial and multifamily real estate loan portfolio decreased $10.7 million, or 4.5%, to $226.2 million, the commercial business loans portfolio decreased $9.6 million, or 22.3%, to $33.5 million and home equity loan portfolio decreased $2.9 million, or 11.0%, to $23.1 million. The year-over-year decreases were partially offset by increases in the construction and land loan portfolio, which increased $7.5 million, or 12.0%, to $70.2 million, and the consumer loan portfolio, which increased $10.9 million, or 19.0%, to $68.5 million, with the largest increase in consumer loans coming from floating homes loans, which increased $6.6 million, or 19.6%, to $40.2 million. At June 30, 2019, commercial and multifamily real estate loans accounted for approximately 39.9% of total loans and one-to-four family loans, including home equity loans accounted for approximately 29.7% of total loans. Consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for approximately 12.1% of total loans at that date. Construction and land loans accounted for approximately 12.4% of total loans and commercial business loans accounted for approximately 5.9% of total loans at June 30, 2019.

Deposits decreased $4.2 million, or 0.7%, to $579.5 million at June 30, 2019, compared to $583.7 million at March 31, 2019 and increased $40.1 million, or 7.4%, compared to $539.4 million at June 30, 2018. The decrease in deposits compared to the prior quarter was due primarily to decreases in non-interest bearing deposits and money market accounts, partially offset by increases in certificates of deposit. The increase in deposits compared to a year ago was due primarily to increases in non-interest bearing deposits and certificates of deposit, partially offset by decreases in interest bearing demand deposits. We continue our efforts to increase non-interest bearing deposits, which increased $11.5 million, or 13.6% year-over-year, from $84.7 million at June 30, 2018. FHLB borrowings decreased to $16.3 million at June 30, 2019, compared to $25.0 million at March 31, 2019 and $71.0 million at June 30, 2018 as we utilized our deposits for funding needs.

Nonperforming assets ("NPAs"), which are comprised of non-accrual loans, nonperforming troubled debt restructurings ("TDRs"), other real estate owned ("OREO") and other repossessed assets increased $452,000 or 12.4% to $4.1 million at June 30, 2019, from $3.7 million at March 31, 2019 and increased $1.5 million or 55.3% from $2.6 million at June 30, 2018. NPAs to total assets were 0.60%, 0.52% and 0.39% at June 30, 2019, March 31, 2019 and June 30, 2018, respectively.

The following table summarizes our NPAs (dollars in thousands, unaudited):

June 30, 2019

March 31, 2019

June 30, 2018

Balance

% of Total

Balance

% of Total

Balance

% of Total

Nonperforming Loans:

One-to-four family

$

1,049

25.6

%

$

1,041

28.5

%

$

986

37.3

%

Home equity loans

489

11.9

321

8.8

391

14.8

Commercial and multifamily

649

15.8

353

9.7

192

7.3

Construction and land

81

2.0

83

2.3

79

3.0

Manufactured homes

240

5.8

231

6.3

182

6.9

Commercial business

528

12.9

555

15.2

204

7.6

Total nonperforming loans

3,036

74.0

2,584

70.8

2,034

76.9

OREO and Other Repossessed Assets:

One-to-four family

494

12.0

494

13.5

—

—

Commercial and multifamily

575

14.0

575

15.7

600

22.7

Manufactured homes

—

—

—

—

10

0.4

Total OREO and repossessed assets

1,069

26.0

1,069

29.2

610

23.1

Total nonperforming assets

$

4,105

100.0

%

$

3,653

100.0

%

$

2,644

100.0

%

The following table summarizes the allowance for loan losses (dollars in thousands, unaudited):

For the Quarter Ended:

June 30, 2019

March 31, 2019

June 30, 2018

Allowance for Loan Losses

Balance at beginning of period

$

5,577

$

5,774

$

5,328

(Recapture) provision for loan losses during the period

(200

)

(200

)

150

Net (charge-offs) recoveries during the period

(7

)

3

25

Balance at end of period

$

5,370

$

5,577

$

5,503

Allowance for loan losses to total loans

0.95

%

0.95

%

0.93

%

Allowance for loan losses to total nonperforming loans

176.88

%

215.83

%

270.55

%

The decrease in the allowance for loan losses at June 30, 2019, compared to the prior quarter-end and the same date a year ago was primarily due to a recapture from the allowance for loan losses of $200,000 during the period as a result of decreases in the balance of the loans held-for-portfolio. Net loan charge-offs during the second quarter of 2019 totaled $7,000 compared to net recoveries of $3,000 for the quarter ended March 31, 2019 and net recoveries of $25,000 for the quarter ended June 30, 2018.

The allowance for loan losses to total loans held-for-portfolio remained unchanged at 0.95% at June 30, 2019, from March 31, 2019 and increased from 0.93% at June 30, 2018. The allowance for loan losses as a percentage of nonperforming loans decreased to 176.9% at June 30, 2019, compared to 215.8% at March 31, 2019 and 270.6% at June 30, 2018.

Sound Financial Bancorp, Inc., a bank holding company, is the parent company of Sound Community Bank, and is headquartered in Seattle, Washington with full-service branches in Seattle, Tacoma, Mountlake Terrace, Sequim, Port Angeles, Port Ludlow, and University Place. Sound Community Bank is a Fannie Mae Approved Lender and Seller/Servicer with two Loan Production Offices, one located in the Madison Park neighborhood of Seattle and one located in Sequim, Washington. For more information, please visit www.soundcb.com.

Forward Looking Statement Disclaimer

When used in filings by Sound Financial Bancorp, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events, and may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated below or because of other important factors that we cannot foresee that could cause our actual results to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

Factors which could cause actual results to differ materially, include, but are not limited to: changes in general and local economic conditions; legislative changes; changes in policies by regulatory agencies; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; secondary market conditions for loans; results of examinations of the Company or its wholly owned bank subsidiary by their regulators; competition; changes in management's business strategies; changes in the regulatory and tax environments in which the Company operates; and other factors described in the Company's latest annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission – which are available at www.soundcb.com and on the SEC's website at www.sec.gov.

The Company does not undertake - and specifically declines any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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